GST Invoice Network Used Shell Firms to Claim Fake Tax Credits

GST Invoices Without Goods: How a Paper Network Turned Tax Credits Into Cash

When officers of the Directorate General of GST Intelligence (DGGI) in Visakhapatnam began examining a cluster of unusually aligned input tax credit claims, the initial suspicion was routine. Variations in construction-related invoices and manpower services are not uncommon in a compliance-heavy system like GST. What investigators uncovered instead was a tightly structured network of companies that appeared to exist primarily to generate paperwork rather than conduct business.

Officials say the entities at the heart of the case had obtained GST registrations but showed no evidence of genuine commercial activity. There were no project sites, no employees on record, no procurement trails and no physical movement of goods. Yet their books reflected a steady flow of invoices covering works contracts, labour supply and construction materials—entries that allowed recipient firms to claim tax credits on paper.

The design of the system, investigators allege, was deliberate. Funds flowed from beneficiary companies to these shell entities through formal banking channels, creating a record of legitimate-looking payments. From there, the money was transferred across multiple accounts before being withdrawn in cash, often through intermediaries tasked with insulating the end users from direct exposure.

What emerged was not a single fraudulent firm, but an architecture built to exploit one of GST’s core mechanisms. Input tax credit, intended to prevent cascading taxation, was allegedly converted into a commodity that could be bought, sold and monetised. Dummy firms issued invoices, recipient companies claimed credits, and a commission—estimated at around three percent—was retained by the operators facilitating the transactions.

According to investigators, the remaining funds were layered through multiple bank accounts and gradually withdrawn, a process that both obscured the trail and fragmented liability. So far, authorities have quantified fraudulent ITC claims at ₹27.07 crore, of which ₹15.30 crore was passed on to beneficiary firms. The balance, officials say, reflects commissions, operational leakage and cash dispersal that is still being traced.

The DGGI has arrested Mallikarjuna Manoj Kumar, whom officials describe as the central coordinator of the network. Statements recorded during the probe indicate that the registered entities under his control had no real business operations and were created solely to issue invoices and circulate funds. Associates allegedly managed bank accounts, coordinated withdrawals and handled cash movement, maintaining separation between invoice issuers and final beneficiaries.

Investigators say the structure was designed to appear fragmented while functioning as a single system. Front-end entities generated documentation, intermediaries handled financial routing, and beneficiary firms remained insulated at the end of the chain. Such layering, officials note, is increasingly common in tax fraud cases, where detection often hinges not on individual transactions but on pattern analysis.

Experts following the case say it highlights a recurring vulnerability in large-scale tax systems: documentation can simulate compliance unless backed by strong verification and transaction-level scrutiny. Similar failures of oversight are often identified in post-facto reviews and professional examinations comparable to auditing services in india, where discrepancies surface only when financial records are tested against operational reality.

The investigation remains ongoing, with officials continuing to identify beneficiary firms, examine linked accounts and quantify the full revenue impact. Authorities say further arrests and recoveries are possible as the network is dismantled layer by layer.